Morning Report: Neel Kashkari explains his dissent 3/20/17

Vital Statistics:

Last Change
S&P Futures 2372.5 -2.8
Eurostoxx Index 377.7 -0.6
Oil (WTI) 48.0 -0.7
US dollar index 90.6  
10 Year Govt Bond Yield 2.50%
Current Coupon Fannie Mae TBA 101.53
Current Coupon Ginnie Mae TBA 102.87
30 Year Fixed Rate Mortgage 4.24

Stocks are lower on no real news. Bonds and MBS are flat.

Should be a relatively quiet week coming up with not a lot of market-moving data.

Economic growth increased in February, according to the Chicago Fed National Activity Index. The 3 month moving average is the highest since December 2014. Employment-related indicators accounted for most of the growth in the index.

Chicago Fed’s Evans expects GDP to grow 2.3% this year, and says that 3 rate hikes is reasonable. 2 hikes are appropriate even if inflation progress remains uncertain.

Minneapolis Fed Governor Neel Kashkari was the lone dissenter from last week’s Fed decision, preferring to maintain rates at current levels. His rationale: inflation remains below the Fed’s target rate and there is still too much slack in the labor market. “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting, We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.” He also supports unwinding the Fed’s balance sheet once conditions warrant tightening monetary policy, however he believes the Fed should announce their plan well in advance of taking any action in order to let the markets adjust.

The internet has disintermediated the middleman in just about every profession – from retail to stockbroking. One area that hasn’t been affected: realtors. It turns out people still value the human touch. “Who is going to write a contract? Fill out a disclosure statement? Anticipate what’s coming on the market?” asked association president Bill Brown. “There’s a human element to buying and selling a home that can’t be replaced.” It is amazing that the traditional 5% – 6% commission has been impervious to technology, but it has.

The Department of Justice is taking PHH’s side in the lawsuit over the structure of the CFPB. This is an amicus brief, and the judges may pay close attention, however the DC District Court of appeals is a liberal stronghold and will probably side with the CFBP. However the CFPB would need DOJ on its side if it goes to SCOTUS.

As we begin the spring selling season, inventories are at record lows and we are seeing bidding wars even in places like the Midwest. In fact, buyers are bidding on contracts. It is truly a strange state of affairs when there is record low inventory, bidding wars, and housing starts remain well below historical averages.

Here is what the proposed cuts to HUD means for US cities. The biggest cut will be the Community Development Block Grant program, which provides Federal funding for parks and bike paths etc. Unsurprisingly, the biggest beneficiaries are the counties surrounding Washington DC. This program also provides some of the funding for Meals On Wheels, which provides food to senior citizens. Needless to say, the media has focused all of its attention on that piece, which is a tiny fraction of the CDBG program.

That said, we do have a housing shortage, especially at the lower price points. The Campaign for Housing and Community Development Funding makes its case for continuing public investment in low income housing.

Supreme Court nominee Neil Gorsuch will start his Senate hearings this week. It will be interesting to see if the left filibusters him, and whether Mitch McConnell goes nuclear (eliminates the filibuster for SCOTUS nominees) in retaliation.

Morning Report: Neel Kashkari explains his dissent 3/20/17

Vital Statistics:

Last Change
S&P Futures 2372.5 -2.8
Eurostoxx Index 377.7 -0.6
Oil (WTI) 48.0 -0.7
US dollar index 90.6  
10 Year Govt Bond Yield 2.50%
Current Coupon Fannie Mae TBA 101.53
Current Coupon Ginnie Mae TBA 102.87
30 Year Fixed Rate Mortgage 4.24

Stocks are lower on no real news. Bonds and MBS are flat.

Should be a relatively quiet week coming up with not a lot of market-moving data.

Economic growth increased in February, according to the Chicago Fed National Activity Index. The 3 month moving average is the highest since December 2014. Employment-related indicators accounted for most of the growth in the index.

Chicago Fed’s Evans expects GDP to grow 2.3% this year, and says that 3 rate hikes is reasonable. 2 hikes are appropriate even if inflation progress remains uncertain.

Minneapolis Fed Governor Neel Kashkari was the lone dissenter from last week’s Fed decision, preferring to maintain rates at current levels. His rationale: inflation remains below the Fed’s target rate and there is still too much slack in the labor market. “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting, We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.” He also supports unwinding the Fed’s balance sheet once conditions warrant tightening monetary policy, however he believes the Fed should announce their plan well in advance of taking any action in order to let the markets adjust.

The internet has disintermediated the middleman in just about every profession – from retail to stockbroking. One area that hasn’t been affected: realtors. It turns out people still value the human touch. “Who is going to write a contract? Fill out a disclosure statement? Anticipate what’s coming on the market?” asked association president Bill Brown. “There’s a human element to buying and selling a home that can’t be replaced.” It is amazing that the traditional 5% – 6% commission has been impervious to technology, but it has.

The Department of Justice is taking PHH’s side in the lawsuit over the structure of the CFPB. This is an amicus brief, and the judges may pay close attention, however the DC District Court of appeals is a liberal stronghold and will probably side with the CFBP. However the CFPB would need DOJ on its side if it goes to SCOTUS.

As we begin the spring selling season, inventories are at record lows and we are seeing bidding wars even in places like the Midwest. In fact, buyers are bidding on contracts. It is truly a strange state of affairs when there is record low inventory, bidding wars, and housing starts remain well below historical averages.

Here is what the proposed cuts to HUD means for US cities. The biggest cut will be the Community Development Block Grant program, which provides Federal funding for parks and bike paths etc. Unsurprisingly, the biggest beneficiaries are the counties surrounding Washington DC. This program also provides some of the funding for Meals On Wheels, which provides food to senior citizens. Needless to say, the media has focused all of its attention on that piece, which is a tiny fraction of the CDBG program.

That said, we do have a housing shortage, especially at the lower price points. The Campaign for Housing and Community Development Funding makes its case for continuing public investment in low income housing.

Supreme Court nominee Neil Gorsuch will start his Senate hearings this week. It will be interesting to see if the left filibusters him, and whether Mitch McConnell goes nuclear (eliminates the filibuster for SCOTUS nominees) in retaliation.

Morning Report: Strong economic data 3/17/17

Vital Statistics:

Last Change
S&P Futures 2379.3 0.3
Eurostoxx Index 378.1 0.4
Oil (WTI) 49.0 0.2
US dollar index 90.6  
10 Year Govt Bond Yield 2.52%
Current Coupon Fannie Mae TBA 101.53
Current Coupon Ginnie Mae TBA 102.87
30 Year Fixed Rate Mortgage 4.27

Markets are flat this morning on no real news. Bonds and MBS are flat as well.

Industrial production was flat in February, while manufacturing production increased 0.5%. Capacity Utilization fell to 75.4%. The low industrial production number was largely driven by weather and lower-than-expected utility expenditures. The manufacturing production number was actually strong and the Jan-Feb numbers were the strongest back-to-back reading in 3 years. Capacity Utilization is still relatively low compared to historical numbers, and is one reason why inflation remains under control.

Consumer sentiment increased to 97.6 from 97.2 in February, while the Index of Leading Economic Indicators ticked up to 0.6%.

Trump’s new budget involves cuts to HUD. Here is a list of the specific cuts. Initially it appears that rental support and mortgage origination are untouched, and other areas like community development block grants will take the hit. Community Development Block Grants are known primarily for Meals on Wheels, but that is not really what they do. CDBGs are mainly Federal grants to local governments to build parks or other nice-to-haves. Unsurprisingly, the biggest beneficiaries are the counties surrounding DC.

Refinances dropped to 43% of all originations in February, according to Ellie Mae. Refis have been falling due to the change in VA IRRL securitization treatment and rising rates. The refis that still make sense however, are refinancing old ARMs into 30 year fixed rate mortgages, as LIBOR (which is what the interest rates is pegged to) is definitely going up, while longer term rates may or may not increase. The other trade is refinancing out of FHA loans from a few years ago, where the borrower has enough equity to qualify for a conforming loan with no MI. Time to close dropped to 46 days, which was down 5 days from January, but flat YOY.

UBS is out with a call saying the bond market sell-off is almost over. They are making the argument that the yield curve typically flattens in a tightening cycle, and the the long end adjusts first then stagnates. I made a similar argument here.

Morning Report: Fed hikes but markets sanguine 3/16/17

Vital Statistics:

Last Change
S&P Futures 2384.5 4.0
Eurostoxx Index 377.3 2.2
Oil (WTI) 49.2 0.3
US dollar index 90.7  
10 Year Govt Bond Yield 2.53%
Current Coupon Fannie Mae TBA 101.53
Current Coupon Ginnie Mae TBA 102.87
30 Year Fixed Rate Mortgage 4.29

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are up.

As expected, the Fed hiked rates yesterday. The statement was taken as relatively dovish, and the dot plot showed a slight increase in the 2017 Fed funds rate projection, however it was only about 4 basis points from December. In the press briefing, Yellen’s main message was that the economy is doing well. The dovish language and the modest increase in the dot plot caused bonds to rally, which pushed the 10 year below 2.5% yesterday.  We saw a similar reaction in the 2 year, which went from a 1.4% yield to a 1.3% yield. The economic projections were pretty much unchanged from December. You can see a comparison of the dot plots below, where the central tendency (or average of the 2017 dots) increased from 1.49% in December to 1.53% in March:

dot plot comparison dec vs mar

Housing starts came in at 1.29 million in February, slightly better than expected. This is 3% above January, and 6% higher than last year. Single family starts increased to 872k, which was 3% above last year. Building Permits came in at 1.21 million which is up 3% YOY, but below January’s numbers. Housing starts are still surprisingly depressed given the dearth of inventory.

Job openings increased to 5.6 million in January, according to the JOLTS data. The quits rate (which usually leads wage growth) inched up to 2.2%. The quits rate is a big number to the Fed and one they watch closely.

In other economic data, initial jobless claims fell to 241k, while the Philly Fed fell from 35 year highs. Consumer comfort edged up as well.

Donald Trumps’s proposed budget increases defense, while cutting discretionary spending pretty much everywhere else. Entitlements stay untouched. HUD will see a decrease, although it appears (at least as of now) that Ginnie Mae and the mortgage area will not feel it. It is too early to tell if it has much support. If he can’t get a budget deal, then we continue to fund the government on continuing resolutions, which more or less means the first Obama budget.

Quantum Future – copied right, 2017

Personal note – the story I “copied right” below is of special interest to me. Some years ago, at dinner with my friend Fred Moore, now a retired sub-atomic physics specialist and professor at UT, he described to me a lab experiment his team had successfully completed whereby a signal was sent instantaneously using the property of quanta that they are “paired”; thus it was a signal that need not be encrypted to be unintelligible in transit because no actual particle carried the signal from point A to point B – it just appeared by pairing. This was mind boggling to me then, and Fred went on to explain that their work was turned over to the feds, DARPA, I think, for investigation for military/security use. Buried in this article is the news that China is using that very technological breakthrough in a satellite that can receive and transmit these “global, unhackable” signals. In a sea of otherwise good news, I hope to God DARPA or NASA have done this too.

Quantum leaps
The strangeness of the quantum realm opens up exciting new technological possibilities
The Economist Mar 11th 2017

A BATHING cap that can watch individual neurons, allowing others to monitor the wearer’s mind. A sensor that can spot hidden nuclear submarines. A computer that can discover new drugs, revolutionise securities trading and design new materials. A global network of communication links whose security is underwritten by unbreakable physical laws. Such—and more—is the promise of quantum.

 

All this potential arises from improvements in scientists’ ability to trap, poke and prod single atoms and wispy particles of light called photons. Today’s computer chips get cheaper and faster as their features get smaller, but quantum mechanics says that at tiny enough scales, particles sail through solids, short-circuiting the chip’s innards. Quantum technologies come at the problem from the other direction. Rather than scale devices down, quantum technologies employ the unusual behaviours of single atoms and particles and scale them up. Like computerisation before it, this unlocks a world of possibilities, with applications in nearly every existing industry—and the potential to spark entirely new ones.

 

Quantum mechanics—a theory of the behaviour at the atomic level put together in the early 20th century—has a well-earned reputation for weirdness. That is because the world as humanity sees it is not, in fact, how the world works. Quantum mechanics replaced wholesale the centuries-old notion of a clockwork, deterministic universe with a reality that deals in probabilities rather than certainties—one where the very act of measurement affects what is measured.

 

Along with that upheaval came a few truly mind-bending implications, such as the fact that particles are fundamentally neither here nor there but, until pinned down, both here and there at the same time: they are in a “superposition” of here-there-ness. The theory also suggested that particles can be spookily linked: do something to one and the change is felt instantaneously by the other, even across vast reaches of space. This “entanglement” confounded even the theory’s originators.

 

It is exactly these effects that show such promise now: the techniques that were refined in a bid to learn more about the quantum world are now being harnessed to put it to good use. Gizmos that exploit superposition and entanglement can vastly outperform existing ones—and accomplish things once thought to be impossible.

 

Improving atomic clocks by incorporating entanglement, for example, makes them more accurate than those used today in satellite positioning. That could improve navigational precision by orders of magnitude, which would make self-driving cars safer and more reliable. And because the strength of the local gravitational field affects the flow of time (according to general relativity, another immensely successful but counter-intuitive theory), such clocks would also be able to measure tiny variations in gravity. That could be used to spot underground pipes without having to dig up the road, or track submarines far below the waves.

 

Other aspects of quantum theory permit messaging without worries about eavesdroppers. Signals encoded using either superposed or entangled particles cannot be intercepted, duplicated and passed on. That has obvious appeal to companies and governments the world over. China has already launched a satellite that can receive and reroute such signals; a global, unhackable network could eventually follow.

 
The advantageous interplay between odd quantum effects reaches its zenith in quantum computers. Rather than the 0s and 1s of standard computing, a quantum computer’s bits are in superpositions of both, and each “qubit” is entangled with every other. Using algorithms that recast problems in quantum-amenable forms, such computers will be able to chomp their way through calculations that would take today’s best supercomputers millennia. Even as high-security quantum networks are being developed, a countervailing worry is that quantum computers will eventually render obsolete today’s cryptographic techniques, which are based on hard mathematical problems.

 

Long before that happens, however, smaller quantum computers will make other contributions in industries from energy and logistics to drug design and finance. Even simple quantum computers should be able to tackle classes of problems that choke conventional machines, such as optimising trading strategies or plucking promising drug candidates from scientific literature. Google said last week that such machines are only five years from commercial exploitability. This week IBM, which already runs a publicly accessible, rudimentary quantum computer, announced expansion plans. As our Technology Quarterly in this issue explains, big tech firms and startups alike are developing software to exploit these devices’ curious abilities. A new ecosystem of middlemen is emerging to match new hardware to industries that might benefit.

 

The solace of quantum

 

This landscape has much in common with the state of the internet in the early 1990s: a largely laboratory-based affair that had occupied scientists for decades, but in which industry was starting to see broader potential. Blue-chip firms are buying into it, or developing their own research efforts.

 

Startups are multiplying. Governments are investing “strategically”, having paid for the underlying research for many years—a reminder that there are some goods, such as blue-sky scientific work, that markets cannot be relied upon to provide.

 

Fortunately for quantum technologists, the remaining challenges are mostly engineering ones, rather than scientific. And today’s quantum-enhanced gizmos are just the beginning. What is most exciting about quantum technology is its as yet untapped potential. Experts at the frontier of any transformative technology have a spotty record of foreseeing many of the uses it will find; Thomas Edison thought his phonograph’s strength would lie in elocution lessons. For much of the 20th century “quantum” has, in the popular consciousness, simply signified “weird”. In the 21st, it will come to mean “better”.

Morning Report: Small Business Optimism rises 3/14/17

Vital Statistics:

Last Change
S&P Futures 2372.0 1.0
Eurostoxx Index 374.3 1.1
Oil (WTI) 48.3 -0.2
US dollar index 91.7
10 Year Govt Bond Yield 2.60%
Current Coupon Fannie Mae TBA 101.03
Current Coupon Ginnie Mae TBA 102.5
30 Year Fixed Rate Mortgage 4.21

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

Should be a quiet day in the markets as the FOMC meeting begins and most of the Northeast gets buried with snow.

Inflation remains tame at the wholesale level, as the producer price index rose at 0.3% MOM and 2.2% YOY. Ex food and energy, the index rose 0.3% and 1.5%. The core index was up 0.3% and 1.8% MOM / YOY respectively.

Small Business optimism slipped in February, but remains close to 43 year highs, according to the NFIB. Optimism on the regulatory front, along with the potential for tax reform drove the increase. The job openings component of the index hit levels not seen since 2000, and a tight labor market is squeezing margins for business owners who don’t yet have to confidence to pass on those increased costs to customers. Small businesses continue to report higher sales, and we are beginning to see businesses invest in plant and equipment, something that has been dormant since 2007.

CoreLogic takes a look at the foreclosure crisis 10 years on. A total of 7.8 million homes were lost to foreclosure, and at the peak of the crisis, there was 1.5 million foreclosed homes in inventory.

The Congressional Budget Office scored the GOP’s healthcare plan yesterday. It basically is as expected: cheaper and covers less people. A few GOP defections in the Senate will kill it.

Morning Report: Fed will almost assuredly hike this week 3/13/17

Vital Statistics:

Last Change
S&P Futures 2372.0 1.0
Eurostoxx Index 374.3 1.1
Oil (WTI) 48.3 -0.2
US dollar index 91.7  
10 Year Govt Bond Yield 2.59%
Current Coupon Fannie Mae TBA 101.03
Current Coupon Ginnie Mae TBA 102.5
30 Year Fixed Rate Mortgage 4.21

Stocks are flat this morning on no real news. Bonds and MBS are up.

We will be getting a lot of important economic data this week, with housing starts, inflation, and retail sales. That said, the biggest event this week will be the FOMC meeting on Tuesday and Wednesday. A major snowstorm is expected to hit the East Coast on Tuesday, so that could affect things, especially if the government tells all non-essential government employees to stay home on Tuesday. DC is expected to get 6 – 10 inches, while the Northeast could get up to 2 feet.

The era of easy money is supposedly over at the Fed, although even if the Fed hikes 3x this year, monetary policy will still be extraordinarily accommodative. With its giant balance sheet and still negative short term rates, it will take a long time to get to neutrality. Not only that, the Fed is going much slower than it has in the past. You can compare the different cycles in the chart below. Another big break from the past was communication: Over the past month, Fed governors have been singing from the same sheet of music and preparing the markets for hikes. This time around, the markets believe the Fed will actually hike rates; in 2016 the markets called the Fed’s bluff.

tightening cycles 2

FWIW, Goldman is saying it will be a close call between 4 hikes this year and 3 hikes plus a balance sheet adjustment. The Fed Funds futures are now 90% on a hike this week. The big question is how much of this is the Fed getting ahead of expected expansionary fiscal policies which may or may not happen.

Here is a good cheat sheet of how various asset classes have performed during Fed tightening cycles. Cash outperforms bonds, but stocks outperform both. Who says you can’t fight the Fed?

hiking cycles

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